We can point out the errors to be avoided much more successfully than we can lay out a course of positive action.

G.C. Selden wrote that line in 1912. It fits Munger’s idea of inversion: figure out the best ways to lose money, then avoid doing those things. It’s a common-sense way to improve returns.

I came across this idea twice this week (it happens every week, really) from century-old sources. Selden covered the usual suspects — over-optimism, enthusiasm, stubbornness, fear, anger, greed — before summarizing his book on investor psychology. Continue Reading…

Severn years before Edwin Lefevre began a series of articles that would become Reminiscences of a Stock Operator, he warned of the perils in speculation. He likened it to gambling on an unbeatable game.

His reason was no different than what’s been repeated millions of times since. Speculators are more likely to beat themselves before they ever beat the market.

What makes the game of stock speculation the most dangerous of all is the variety of pleasing disguises it is able to assume. Being born of greed, it feeds on greed, and thereby waxes greater. If that were all it did, of if it did this openly, it would not be so dangerous; but besides the additional lure of adventure there is the irresistible appeal to vanity, the challenge to pit your wits against other wits, and even against Nature and the vagaries of the weather and the weaknesses of men. It most often masquerades as a legitimate business operation, subject to and governed by the ordinary rules of ordinary business.

Greed, vanity, and ignorance make for a bad combination for speculators. It leads to all the familiar mistakes — chasing “easy money,” over trading, unable to quit while ahead — that inevitably lead to their downfall.

Lefevre warned readers about all of this in 1915, then relayed the 10 Hells: Continue Reading…